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Chartered Postgraduate Diploma in Marketing (Level 7)

561 – Analysis and Decision

© The Chartered Institute of Marketing 2014

Case Study

December 2014 and March 2015

British Airways

561 – Analysis and Decision

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Analysis and Decision – Case Study Important guidance notes for candidates regarding the pre-prepared analysis The examination is designed to assess knowledge and understanding of the Analysis and Decision syllabus, in the context of the relevant case study. The examiners will be marking candidates’ scripts on the basis of the tasks set. Candidates are advised to pay particular attention to the mark allocation on the examination paper and plan their time accordingly. The role is outlined in the Candidate’s Brief and candidates will be required to recommend clear courses of action. Candidates should acquaint themselves thoroughly with the case study and be prepared to follow closely the instructions given to them on the examination day. Candidates are advised not to waste valuable time collecting unnecessary data. The cases are based upon real-life situations and all the information about the chosen organisation is contained within the case study. No useful purpose will therefore be served by contacting companies in the industry and candidates are strictly instructed not to do so as it may cause unnecessary confusion. As in real life, anomalies may be found in the information provided within this case study. Please state any assumptions, where necessary, when answering tasks. The Chartered Institute of Marketing is not in a position to answer queries on case data. Candidates are tested on their overall understanding of the case and its key issues, not on minor details. In preparation for the examination, candidates need to carry out a detailed strategic marketing audit of the case study. The audit allows candidates to demonstrate their ability to: apply the appropriate models and techniques to analyse information on an

organisation/sector facing particular circumstances interpret the results of this audit to provide insights into the current situation and the

conclusions they are able to draw utilise their own ideas and create their own models for interpreting the data. When compiling their audit, candidates should only use the information found within the case, supported by their knowledge and understanding of the syllabus. Candidates are expected to bring individuality to their audit and submit their own work. In doing so, they must not attach essay-style descriptive work that could be considered as an attempt to gain unfair advantage whilst responding to the examination tasks. The copying of pre-prepared ‘group’ answers, including those written by consultants/tutors, or by any third party, is strictly forbidden and will be penalised by failure. The tasks will demand analysis in the examination itself and individually composed answers are required to pass. Candidates will then need to condense their strategic marketing audit into a SIX page summary (a maximum of six sides of A4, no smaller than font size 11. The content of tables, models or diagrams must be in a minimum of font size 8). The six sides must contain a summary of the audit only. It should not contain decisions, objectives or plans. The audit should be numbered for ease of reference when answering the examination tasks. Although no marks are awarded for the audit itself, candidates will be awarded marks for how the audit is used and referred to in answering the tasks set.

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Candidates are advised not to repeat or copy the audit summary when answering the exam tasks. It is important that candidates refer the examiner to the audit summary, where and when appropriate, when answering the tasks. Candidates must hole-punch and staple their summary audit in the top left hand corner. They should have written their CIM membership number and examination centre name on the top of the right hand corner of each page of the audit. It should then be attached to the answer book on completion of their examination, using the treasury tag provided. Candidates must take their original copy of the case study (not a photocopy) and summary audit into the examination room. The case study may be annotated with ideas for possible decisions or courses of action. Candidates may not attach any other additional information in any format to their answer book. Any attempt to introduce such additional material will result in the candidate’s paper being declared null and void. The Chartered Institute of Marketing reserves the right not to mark any submission that does not comply with these guidelines.

Important Notice The following data has been based on real-life organisations, but details have been changed for assessment purposes and do not necessarily reflect current management practices of the industries or the views and opinions of The Chartered Institute of Marketing. Candidates are strictly instructed NOT to contact individuals or organisations mentioned in the case study or any other organisations in the industry. Copies of the case study may be obtained from: The Chartered Institute of Marketing, Moor Hall, Cookham, Berkshire SL6 9QH, UK or may be downloaded from the CIM student website www.cimlearningzone.co.uk.

© The Chartered Institute of Marketing 2014. All rights reserved. This assessment, in full or in part, cannot be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior written permission of The Chartered Institute of Marketing.

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ANALYSIS AND DECISION

CASE STUDY Candidate brief

Scenario You are a self-employed Marketing Consultant who has been hired by British Airways. You have been asked by British Airways (BA) to undertake a strategic marketing audit to analyse both internal and external factors impacting the future of the organisation, including consideration of core competences, competitive advantage and value creation. You should also consider the changing nature of the airline industry and the key issues and risks that would impact upon BA in developing its future vision and strategy. BA is seeking insights into how it can maximise profitability and growth and maintain its competitive position as a brand leader and successful innovator. You have been asked to consider how the organisation can work with its stakeholders to maximise opportunities. Consideration should be given to the organisation’s financial position, its strategic risks, organisation risks and mitigating strategies to overcome risks.

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Contents

Background - The UK Airline Industry 8

British Airways 8

Vision and organisational culture 10

Strategy 10

Key trends facing the British airline industry 12

Customer behaviours and preferences 13

Changes in value proposition 14

External global issues 16

British Airways’ main competitors 16

Risks to British Airways’ and competitors’ future performance 19

Appendices 22

Grade descriptors 39

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Appendices

1 Headline financial details for British Airways and competitors 22-23

2 Passengers uplifted at UK airports, 2007-2012 24

3 Passengers uplifted, by UK airport, 2007-2012 25

4 Most popular overseas travel destinations for UK residents, 2007-2012

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5 Purpose of flights taken over the past 12 months, April 2013 27

6 Number of times flown in the last 12 months, April 2013 27

7 Destination regions, types of airline and classes of travel flown in the last 12 months, April 2013

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8 Important factors in choosing an airline, April 2013 28

9 Likely incentives for choosing a particular airline regularly, April 2013 29

10 Length of time people are prepared to spend travelling by budget airline, April 2013

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11 Agreement with attitudes towards air travel, April 2013 30

12 British Airways Plc twelve month results 2012 31

13 British Airways Plc consolidated balance sheet 31-32

14 British Airways Plc consolidated cash-flow statement 33-34

15 British Airways Plc consolidated income statement 34-35

16 New uses of digital technology: BA uses new tech for outdoor campaign

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17 Introduction of new bigger planes: British Airways details A380 and 787 plans for 2014

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18 Airports Commission reveals expansion shortlist 38

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The UK Airline Industry Background Overall, the airlines industry continues to experience a financially uncertain period. Global recession has reduced passenger demand – although there are promising signs of recent recovery and while jet fuel costs have gone from representing 10% of an airline’s operating costs just over a decade ago to nearer 35% now. To survive, some smaller airlines have had to merge with financially solvent competitors, resulting in a much smaller marketplace. Taking just the US market as an example, ten airlines controlled more than 90% of capacity in 2000, but by 2012 a ‘Big Five’ – largely created through mergers – now fly 85% of passengers. Airlines continue to cut flights to reduce capacity, especially on smaller aircraft. Other ways airlines are ensuring they stay in the black are fare increases and ancillary – or ‘add-on’ –charges like bag fees, where additional costs are added to the headline or advertised price. The good news for travellers is that there are fewer flight delays and cancellations. Many industry experts seem to be agreeing that changes in the number of airlines controlling the industry, fare increases, and capacity reductions that began in 2008 are not a brief phase, but rather perhaps new ‘normals’ that could remain for years to come. British Airways British Airways is the UK’s flag carrier airline and its largest, based on fleet size and number of international flights. It is not, however, the largest based on total numbers of passengers flown – a title lost to easyJet in 2008. Since its inception, British Airways has been centred at its main hub at London Heathrow Airport, with a second major hub at London Gatwick Airport. British Airways was launched as a state-owned company in 1974, with full privatisation following in 1987. Its roots stretch back to the earliest years of commercial airlines, when four pioneer airlines – Handley Page Transport, British Marine Air Navigation Co Ltd, Daimler Airways and Instone Air Line Ltd – joined together to form Imperial Airways Limited, which began operations in 1924. The airline developed routes throughout the British Empire, from the UK to India, some parts of Africa and later to Australia. In 1939, the UK government joined Imperial Airways together with British Airways – originally a collection of much smaller private aviation companies – to form the nationalised British Overseas Airways Corporation (BOAC). Further government rationalisation led to the merger of BOAC with British European Airways (BEA) to form the single national carrier British Airways from 1 April 1974. By the 1990s, following privatisation and the global impact of using the supersonic airliner Concorde, British Airways had become the world’s most profitable airline. However, the coming of budget airlines, a strong pound and the rising price of oil all took their toll, with British Airways’ turnover and profitability dropping accordingly. In 2010, it was confirmed that British Airways and Iberia Airlines had agreed to merge, making the combined commercial airline – known as International Airlines Group (IAG) – the third largest in the world by revenue. The two airlines agreed to retain their separate brands and, at the time of the merger, the newly formed group had over 400 aircraft and flew to more than 200 destinations across the globe.

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British Airways’ strong brand image gives it a significant competitive advantage and has helped drive higher sales growth in both domestic and international markets. However, intense competition remains a threat to its operating margins. As well as being the UK’s largest international scheduled airline, British Airways is one of the world’s leading global airlines. It retains a carefully-built strong brand image, winning first place, for instance, in the ‘Favourite Airline’ category of 2012’s Global Travel Awards. It has also won recent British Travel Awards for best short-haul airline and best airline for customer service. Such brand recognition allows British Airways to charge higher premium prices than its competitors, and this supports relatively higher margins. In 2012, British Airways derived 44% of its revenues from the UK market, 20% from the USA and Canada, 16% from continental Europe, 10% from Africa, the Middle East and India, 7% from the Far East and Australasia and the remaining 3% from the rest of the Americas. Such diversity offers the company more routes to future revenue growth, while also reducing its exposure to risk in any particular market. With its large unionised workforce, British Airways has found it hard to avoid regular conflicts over wage and labour issues. For instance, in 2010, the company faced its first national strike since 1997, following a dispute over pay and conditions for its cabin crew. The dispute escalated as British Airways withdrew staff travel concessions from workers who joined strike action, and began to sack or suspend crew members, including many union representatives. Unite, the union representing the majority of the company’s workforce, held 22 days of strikes, resulting in losses to the company of over £150 million. Later, in 2012, a group of non-UK based cabin crew accused the airline of discrimination over the withdrawal of travel concessions during the 2010 strikes. This group of 30 sought redress from British Airways because they lived outside the UK and relied on discounted fares to commute into and out of Heathrow Airport. Such actions disrupt operations and inevitably affect the reputation of British Airways, leaving the company incurring higher expenses to meet the expectations and demands of its workforce. Following a period of stagnation, the UK airlines industry is forecast to grow by 13.2% between 2012 and 2016. Since the recent takeover of British Midland Limited (bmi) by British Airways’ parent company IAG, the company now owns an additional 56 daily slots at Heathrow, giving an excellent opportunity to respond to and accommodate this new growth. Similarly, the global tourism industry has recovered well since being hit by recession in 2008. According to the World Tourism Organisation, international tourism arrivals grew by 4% in 2012, with a further 3-4% growth expected globally in 2013. Also, the global air freight sector is forecast to achieve fair growth in the period up to 2017. With its strong operational base and expertise, British Airways is well positioned to benefit accordingly. The airlines industry is likely to see continued intense competition – across many factors, not just fares – and price discounting. British Airways faces direct competition on all of its routes as well as from pre-arranged, or ‘charter’*, services and other modes of transport. A relatively small change in pricing or passenger traffic could have a disproportionate effect on the airline’s operating and financial results. *A ‘charter’ service is a flight that takes place outside normal schedules, usually through a hiring arrangement. Typically, tickets are not sold directly by the charter airline to the passengers, but by holiday companies who have chartered the flight.

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Fuel prices remain volatile and are likely to increase in the medium-to-long term. Kerosene jet fuel accounts for a major element of operational expenditure, so the fact that fuel prices are expected to rise from $12.7 per million British thermal units (btu) in 2009 to $23.7 per million btu in 2017, and $27.6 per million btu in 2030 can only threaten to impact seriously on British Airways’ profitability and margins over the period. All airlines are subject to a variety of extensive regulatory and legal compliance requirements across the world. Additional laws and requirements, often connected with governments’ aspirations to environmental sustainability, remain likely, and in turn would impose increased obligations on British Airways. Vision and organisational culture British Airways is now part of International Airlines Group (IAG), following its merger with Iberia Airlines in 2010. IAG is one of the world’s largest airline groups, with over 400 aircraft flying to more than 200 destinations and carrying more than 54 million passengers every year. In its 2012 Annual Report and Accounts, IAG describes its mission as: ‘to win the customer through service and value, deliver higher returns to our shareholders, attract and develop the best people, provide a platform for future consolidation and retain the brands and cultures of the individual airlines which make up IAG.’ The last phrase confirms that British Airways and Iberia Airlines will continue as separate customer-facing brands, despite operating under one company structure. IAG Chief Executive Willie Walsh, in the same report, talks of the company’s vision for the future: ‘Our simple vision is to be a multi-national, multi-brand organisation. The combination of British Airways and Iberia is just the start, not the full ambition of the organisation and we believe we can add additional brands. That’s the thinking behind our proposed acquisition of Vueling**, a low cost brand that, as a third independently-run operation within the Group, can successfully add to our performance and add value for our shareholders. So it’s a very simple vision and we’re determined to deliver on it. We’ve made a good start and I’m very optimistic we can continue to build on our progress to date in 2013.’ (**Vueling was Spain’s second largest airline, in which Iberia had a minority stake. IAG bought the remaining shares to become outright owner later in 2013.) Pressures within the industry, coupled with British Airways’ own consolidation adventure through the IAG initiative, have helped define a new organisational culture. Not only has it been essential to create a leaner, flatter organisation (in management terms), but British Airways has seen an opportunity to mark itself out as an airline that promotes and delivers distinctive high performance. Its ‘Complete 2012’ programme aimed to transform the way staff and suppliers interacted with each other, how they measured individual performance and how they developed and rewarded talent. It also focused on achieving ambitious environmental targets and supporting communities ‘in useful and imaginative ways’. Strategy With passenger numbers rising again and future trends looking more promising than in recent years, British Airways was able to look back on 2012 with some satisfaction. It completed the acquisition and integration of bmi, played a major role in showcasing the UK

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to the world through the London Olympics, and saw customer satisfaction levels reach historically high levels. British Airways acquired British Midland Limited (bmi) from Deutsche Lufthansa AG (Lufthansa) in April 2012 and completed its full integration into British Airways by the end of 2012 with minimal customer disruption. British Airways was able to operate 20 new routes from Heathrow for the winter 2012 season, with the coming years seeing opportunities to convert some of the former bmi slots from short-haul to long-haul operations. The bmi acquisition saw a further 25 short- and mid-haul aircraft enter operations for British Airways, enabling the airline to grow its presence at Heathrow. Delivery of 12 Airbus A380s and 24 Boeing 787 Dreamliners to the fleet began in the summer of 2013. Customer satisfaction improved in 2012, reflecting the airline’s renewed attempts to develop its business around customer expectations. Departure punctuality in 2012, a primary measure, saw 55% of flights ‘Ready to Go’ being prepared for departure at three minutes before the scheduled departure time. 79% of flights departed within 15 minutes of schedule. iPads were issued to more than 2,000 senior cabin crew, providing them with information about customers’ preferences across a whole range of areas, from special meal requests to onward travel plans. Furthermore, any customer service issues arising in the air could be relayed by cabin crew to ground-based colleagues in good time to allow action to be taken quickly to resolve any problems. British Airways is investing £5 billion over five years in new aircraft, smarter cabins, elegant lounges and new technologies, to make life more comfortable in the air and on the ground. A large-scale refurbishment programme of the long-haul fleet is underway, which includes new cabins and technology being fitted on-board eighteen of the airline’s older Boeing 777-200 aircraft, a refresh of fourteen Boeing 767s, and the installation of business class ‘lie-flat’ beds in the seven Airbus A321s acquired from bmi. World Traveller Plus customers now have a choice of meals from the Club World cabin, further enhancing the service customers receive in premium economy. Short-haul customers are enjoying new catering, with a focus on quality and choice. Customers flying to New York through Newark Airport have access to the new lounge which opened in 2012, modelled on the highly popular Galleries Lounge complexes in Terminal 5 at Heathrow. British Airways’ sponsorship of the London 2012 Olympic and Paralympic Games provided the backdrop for a number of successful advertising and brand awareness campaigns. The airline flew more than 2,250 athletes from 28 countries to London, and helped more than 2,400 British athletes, and their coaching teams, to travel around the world to train, compete and qualify. The London Games TV campaign saw 92% of British Airways staff say they felt proud to work for British Airways having seen the advertisement. Engagement with customers via social media also proved a success, with more than six million people interacting with the advert by ‘taking an aircraft down their own street’. The highest awareness of the British Airways brand for five years was achieved as a result of the Games sponsorship, and the campaign delivered a 30% increase in people who were ‘inclined to fly with British Airways’. Many airlines, including British Airways, developed strategic partnerships and consolidation activity during 2012. A Joint Business Agreement with Japan Airlines Co. Ltd (JAL) commenced in October 2012. The two airlines share revenue on applicable flights between Japan and Europe, and there has been an expansion in codeshare arrangements (a

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codeshare is when a flight operated by one airline is marketed by two or more airlines as part of an agreement between them). Frequent flyers are reaping the benefits of the reciprocal loyalty schemes and better aligned schedules. New codeshare arrangements with the Canadian carrier WestJet began in September 2012, allowing BA’s customers to buy connecting services from key cities to Victoria, Edmonton and Ottawa. The North Atlantic Joint Business Agreement with Iberia Líneas Aéreas de España S.A (Iberia) and American Airlines celebrated its second anniversary in October 2012. British Airways has stated it will continue to deepen other partnerships through the extension of codeshare relationships and the development of joint businesses. The airline continues to back the future development of the ‘oneworld alliance’, and in October 2012 sponsored the introduction of Qatar Airways to the alliance. With the sustained high price of fuel, British Airways has paid considerable attention to managing controllable costs. The airline has prioritised short-haul improvements in its drive to secure a competitive cost base, such as implementing a transformation plan at Gatwick. During 2013 it continued to drive more revenue per flight through ancillary services, exploiting under-utilised assets such as Avios (a travel rewards programme for customers) and maximising the value from major supplier contracts. International Consolidated Airlines Group S.A. (lAG, British Airways’ parent company) has also committed to deliver €560 million in synergies across the combined business within five years. For many years, British Airways has been known for its approach to high-profile advertising, perhaps the most famous example being ‘The World’s Favourite Airline’ campaign launched in the 1980s. ‘The Flower Duet’ by Léo Delibes, together with the launch of the iconic ‘Face’ advertisement, became globally successful branding associations. The slogan was dropped in 2001 after Lufthansa overtook British Airways in terms of passenger numbers. The Flower Duet is still used by the airline, and has been through several different arrangements since 1989. The most recent version of this melody was broadcast in 2007 with a new slogan: ‘Upgrade to British Airways’. Other advertising slogans have included ‘The World's Best Airline’, ‘We'll Take More Care Of You’, and ‘Fly the Flag’. British Airways purchased the internet domain ba.com in 2002 from previous owner Bell Atlantic, 'BA' being the company's acronym and its IATA Airline code. In 2011, British Airways launched its biggest advertising campaign in a decade, including a 90-second cinematic advert celebrating the airline's ninety-year heritage and a new slogan ‘To Fly. To Serve’. Key trends facing the British airline industry Airline travel to and from the UK, in common with most other areas of national and international economies, has been adversely affected by global recession since 2007/08. In the six-year period between 2007 and 2012 overall passenger numbers declined, together with visits to most international destinations, and anticipated future growth rates have slowed. International air travel has largely held its market share compared with trips by sea or through Eurotunnel, but more domestic travellers are driving or taking the train. Many UK regional airports have handled fewer passengers compared with the relative stability at London Heathrow, still the country’s biggest and busiest airport. Taxing and charging regimes have been an issue, although these may be moderated under government regulation and legislation in future years. The volume of passengers to fly from UK airports fell by 11.2% between 2007 and 2010, as an immediate impact of the global economic recession. Despite recovering each year since

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2011, passenger volumes in the early months of 2013 remained 4.6% below 2007 levels. A relatively static pattern was expected to continue through 2013 and into 2014, with UK economic recovery still uncertain and the Eurozone economy entering its sixth quarter of recession between January and March 2013. Leaving domestic travel aside, all overseas destinations have seen a decline in numbers of travellers from the UK between 2007 and 2012. The sharpest drop has been in numbers travelling to North America and what might be termed ‘near-Europe’ – the original 15 members of the European Union, largely those nearest the UK in the west of the continent. Spain and France continue to be by far the most popular destinations for UK air travellers, although both have seen sharp declines during the period. Interestingly, the Middle East appears to be one area of the world receiving slightly more visitors from the UK, with numbers travelling to the United Arab Emirates and Pakistan showing a five-year increase of 13.1% and 1.7% respectively. This general trend has left the market share of each of the leading destinations relatively unchanged since 2007. While air travel accounts for around four out of five overnight trips abroad from the UK, shorter journeys across the Channel have proved good business for other modes, especially Eurotunnel operators. Eurostar has built up an estimated market share of 80% of combined rail/passenger volumes on the London to Paris/Brussels routes. Additional direct train routes from London to the Netherlands and Germany are scheduled to start in 2016. London Heathrow is one of the few UK airports to have seen even modest passenger growth during the period 2007-12. Its 3.1% rise in numbers contrasts markedly with drops of 18.1% at Glasgow, 22.6% at Newcastle and 51.6% at Cardiff. While London’s third airport, at Stansted, saw a similar decline in traffic of 26.5%, the overall trend is one of consolidation at the country’s largest city ‘hub’ airports, especially in London, and steep decline in the smaller regional ‘spoke’ centres. Perhaps the most striking trend affecting British Airways directly is the continued rise in power and prominence across the whole market of ‘low-cost’ airlines such as easyJet and Flybe. While numbers travelling in such carriers rose by 56% between 2007 and 2012, ‘full service’ airlines such as British Airways saw their passenger numbers fall by 5% over the same period. Customer behaviours and preferences Recent research (April 2013) reveals the following aspects of airline customer behaviour, whilst also indicating current and developing trends in the market: Just over half of UK consumers flew in the 12 months ending in April 2013. Almost half flew on holiday; almost one in five to see friends or family, and around 1 in 12 flew on business. Perhaps unsurprisingly, proportions flying declined across the socio-economic categories, with 68% of ABs (largely people in managerial and professional occupations) taking to the skies, compared with just 34% of DEs (semi-skilled and unskilled workers, pensioners). Most air travellers are occasional flyers. Over a third who flew abroad during the 12 months took just one return trip (most likely to be for a holiday). Around one third took three or more return flights during the year. Nearly six in ten took low-cost or budget flights. Just under one-half flew with full-service airlines and nearly one quarter took a charter flight. By far the largest proportion (over 90%) travelled in economy class when flying.

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Whilst price was the dominant factor for those selecting a particular airline (78% said it was an important factor for them), flight times and locations of airports – both for departure and destination – were considered important factors by more than half of those who flew. Flyers have a number of preferred loyalty incentives, without any one option being dominant in their minds. The three most popular among flyers as a whole are the ability to have more seating choice, upgrades to a higher class of travel, and a free flight after a certain number of trips. While low-cost airlines are the most popular overall, customers seem reluctant to extend their no-frill tolerance into longer-haul travel. Large numbers (90%) will travel by budget airline for up to three hours, but for journeys of four hours or more the percentages fall off rapidly. Research shows consumers divided on the question of whether to trade service for price. Six in ten flyers say they do not mind a reduced service on-board if it makes the flight cheaper. However, half would rather pay a little more for an inclusive ticket than for a budget flight. Overall, some 41% of flyers feel that the air travel experience has got worse in recent years, while 42% say they are deterred from flying by the rising cost. Changes in value proposition Holidays represent the largest segment of the UK outbound air travel market, accounting for 64% of all air trips abroad in 2013, declining slightly from 66% in 2007. Business travel accounted for 12% of trips abroad by plane in 2012, again down slightly from 13% in 2007. While both have recovered slightly from the depths of recession, neither customer segment is showing sustained recovery. By contrast, trips by air to visit family or friends abroad fell 18% between 2008 and 2010, but recovered by 11% between 2010 and 2011. Many consumers view this segment as less discretionary than holiday travel and now appear to be making up for lost time, with many important family visits having been postponed during the initial period of recession. The popularity of charter flights shows long term decline. The number of passengers choosing a charter flight dropped by 37% between 2007 and 2012. This forms part of a UK trend away from charter flights to independently-booked travel, accelerated by the sharp reduction in capacity by UK tour operators that took place as the economic downturn began to bite in 2008/09. During the same period, and by contrast, scheduled passenger volumes only fell by 1%, a robust performance, given the economic context. The march of the low-cost, no-frills airline has been remarkable. Between 2007 and 2012, low-cost airlines increased their passenger numbers by 56%, compared with a 5% decline in numbers carried by full service airlines over the same period. easyJet accounts for most of this large increase in the volume carried by budget airlines. In the longer term, according to UK Department for Transport data, the three largest budget airlines operating in the UK – easyJet, Ryanair and Flybe – carried 35% of all UK airport passengers, compared with just 10% in the year 2000. Over this period, the share of passengers at UK airports using British Airways fell slightly, from 21% to 19%. The overall expansion of budget airlines as a whole conceals a mixed picture for individual airlines. Scale and consolidation have become striking features, in common with many markets, as the sector has matured. At an international level some low-cost airlines have failed as high fuel prices and subdued demand have reduced company bottom lines. Flybe

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has been the most prominent casualty of the recession-affected downturn in air travel, while the two European giants – easyJet and Ryanair – have used their size and strength to build market share. Consumers are fairly evenly divided when it comes to the issue of trading off service for price. As mentioned above, just over half say they do not mind reduced service if it means cheaper tickets, but only a slightly smaller proportion say they would rather pay a little more for an inclusive ticket, one that includes checked-in bags and in-flight food. Those who say they are happy to tolerate poorer service for cheaper tickets show little positive attachment or loyalty to the low-cost airline brands. Only 28% of flyers agree with the statement ‘I like the low-cost airline price structure’, with 36% actively disagreeing. Almost three-quarters agree that ‘budget airlines are not so cheap when you take into account all the hidden charges’. Those who are most likely to take advantage of low-cost flights are young people (especially men), either with a young family or no family. Flyers over 55 are the least enthusiastic. So while price is paramount for most travellers most of the time, a substantial proportion of flyers – especially those with higher household incomes – are prepared to pay more if they are convinced they will receive clear value for money. Business travellers are keen on the low-cost pricing structure, but are also more likely to say they would rather pay a little more for an inclusive ticket and also to be able to fly at times that suit them. Those who fly most often are most likely to say that the flying experience has got worse. Occasional flyers still enjoy air travel as part of their holiday adventure, although some will admit to finding the airport experience increasingly trying. In summary, the more often people fly the more negative their experience. Many older flyers yearn for tradition and nostalgia. They are not impressed with the decline in what they might call ‘old-fashioned service’, and indicate that they would tolerate slightly higher prices if features like in-flight entertainment, more legroom and in-flight meals were brought back. They are clear that they do not want – and are certainly not prepared to pay for – luxury travel, but they may well show loyalty to the airlines able to offer more traditional features which their age-group used to take for granted. For them, it may make the difference between choosing one airline over another. Some 42% of flyers say ‘the rising cost of flying puts me off travelling by air’. Female flyers are more likely to be deterred than male flyers. Some 49% of flyers with children say they are put off, compared to 38% of those without children. Flyers aged over 55 are also less likely than the 16-44 age group to be put off by rising costs. Environmental concerns about flying are a worry for some, although they do not necessarily encourage them to fly less. In recent years surveys have revealed a fairly consistent picture of around a quarter of flyers expressing concern about the environmental impact of flying. They are unlikely to be cutting back significantly on flying, let alone stopping altogether, but may be harbouring a level of guilt. Airlines offering lower emissions from their planes, for example, may have an opportunity to gain market share, although the evidence so far suggests that customers are reluctant to pay higher prices simply to guarantee this outcome. Evidence also suggests that while those concerned say they are prepared to make changes to their daily life, different rules apply when they go on holiday.

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External global issues Some global issues are not directly within the industry’s control or even influence, but continue to provide an important context for economic viability in the future. Firstly, there is the pressure on oil prices. Kerosene jet fuel is such a major constituent of any airline’s expenditure that even minor fluctuations in price have major implications. While world prices have been volatile in recent years, mainly due to the impact of global recession, the long-term trend undoubtedly points upwards. Kerosene prices first plummeted in 2008, before recovering by mid-2011. As global economic conditions have again deteriorated, pressure on oil prices has reduced. Nevertheless, the International Air Transport Association (IATA) still expected oil to account for 33% of global airline costs in 2013, compared with only 13% a decade earlier. Looking further ahead, the UK’s Department for Trade expects oil prices to reach $123 per barrel by the year 2030. In the UK, ongoing currency weakness sees the pound sterling still trading against the euro at €1.20, some 20% lower than in pre-recessionary times before 2008. Sterling’s weakness is helping to depress demand for overseas leisure travel, but bolstering the appeal of the UK for inbound visitors. Carbon trading, an international response to concerns about the impact of greenhouse gas emissions on climate change, is still awaiting a global solution, which is bound to affect airlines’ operations and profitability. The longer-term expectation is that costs and fares will rise, given growing emerging market demand for oil and no realistically viable kerosene alternative on the horizon for many years. As the effects of climate change accumulate, there will be growing regulatory and political pressures to make emissions trading work, which may lead to an increased market price of carbon. Airlines will also be under pressure to invest capital in more efficient aircraft technology. British Airways’ main competitors The UK airline market is dominated by three main operators: Ryanair, easyJet and British Airways. In 2012, these three carried 76 million, 51 million and 36 million passengers respectively throughout their global operations. The next biggest carrier operating in the UK market – Thomson Airways – carried 11 million passengers globally, with a number of other operators carrying passenger numbers in the single millions. This clear domination is set to continue for the foreseeable future, sustained by intense competition in each segment of the market. easyJet is the largest UK-based airline in terms of global passengers carried. It achieved impressive growth across its network of 68% between 2007 and 2012, reaching a total of 50.5 million passengers carried, 44% of this number being flown to or from the UK. Its greater expansion in the non-UK market is mirrored by Ryanair which – despite global expansion – saw a 10% drop in its UK traffic between 2008 and 2012. British Airways saw its global passenger numbers fall by 8% between 2007 and 2010, followed by an 11% increase in 2011 and a further 8% rise in 2012. This was partly due to the integration into British Airways of British Midland’s (bmi) Heathrow flights. Jet2.com, a new low-cost, short-haul carrier, has expanded strongly in recent years, with 55% growth in passengers between 2009 and 2012.

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The rest of this section looks in more detail at British Airways’ main competitors in the UK air travel market. Ryanair The Irish airline Ryanair, which is based in Dublin, is the largest operator in the UK market. Launched in 1985 to fly between Waterford, Ireland, and London Gatwick, Ryanair today flies over 1,600 routes across 29 countries. Ryanair is also Europe’s largest airline and the sixth largest in the world. According to Ryanair’s own Investor Relations material: ‘Ryanair’s objective is to firmly establish itself as Europe’s leading low-fares scheduled passenger airline through continued improvements and expanded offerings of its low-fares service. Ryanair aims to offer low fares that generate increased passenger traffic while maintaining a continuous focus on cost-containment and operating efficiencies.’ Ryanair is looking to refresh and expand its fleet by a third by 2018, from 305 to 400 planes, by buying Boeing 737-800 jets. Ryanair has been frustrated by the European Commission in its attempts to take over Irish rival Aer Lingus, in which it already holds a 30% stake, on the grounds that it would risk damaging competition. Ryanair aims to grow towards 110 million passengers by March 2019 and achieve more than a 20% share of the European short-haul market over the same period. This new target replaces a previous growth target of 100 million passengers, as Ryanair aims to step up its annual growth rate to 7% a year. The company has expanded to become the largest airline by passenger volume over the past 12 months in Italy and Poland, and sees significant future opportunities in Germany, Scandinavia and Central Europe. easyjet easyJet was founded in 1995 by Stelios Haji-Ioannou and is the largest UK-based carrier in terms of UK and global passengers carried. easyJet operates 605 routes globally, including 340 from the UK. easyJet Plc is listed on the London Stock Exchange and is a constituent of the FTSE 100 Index. As of 7 March 2013, it employs over 8,000 people, based throughout Europe but mainly in the UK. easyJet has seen rapid expansion since its establishment in 1995, having grown through a combination of acquisitions and base openings, fuelled by consumer demand for low-cost air travel. The airline, along with subsidiary airline easyJet Switzerland, now operates over 200 aircraft, mostly Airbus A319s. It has 23 bases across Europe, the largest being Gatwick. In 2012, easyJet carried over 50 million passengers. It is the second-largest low-cost carrier in Europe, behind Ryanair. One of easyJet’s strategic objectives, reported in 2013, is the ambition to continue driving up demand to become and sustain a position as ‘number 1 or 2’ in the European short-haul market. This appears to be a tacit acknowledgement of Ryanair’s continued strength. easyJet is also looking to maintain its cost advantage, and ensure a disciplined use of capital through the sale and leaseback of aircraft.

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Thomson Airways Thomson Airways has roots going back to 1962. It is the world's largest charter airline, offering scheduled and charter flights from the UK and Republic of Ireland to destinations across Europe, Africa, Asia and North America. Thomson Airways has its origins in several predecessor airlines. Euravia, which was founded in January 1962, was renamed Britannia Airways in December 1964. Orion Airways, founded in 1979 by Horizon Holidays and later owned by the large brewing firm Bass Brewery and InterContinental Hotels Group, was sold and merged into Britannia Airways in 1989. Britannia Airways was rebranded as Thomsonfly in May 2005. The airline is a subsidiary of TUI Travel, formed by the merger of the travel division of TUI AG and First Choice Holidays Plc in September 2007. The two companies' respective airlines, Thomsonfly and First Choice Airways, were merged under the former's Air Operator's Certificate from May 2008, and were rebranded as Thomson Airways on 1 November 2008. The airline carried 10.7 million passengers in 2012, making it the third-largest UK airline by total passengers, after easyJet and British Airways. Flybe Flybe was founded as Jersey European Airways in 1979 and rebranded as British European in 2000. The airline underwent a dramatic transformation in 2002 and was reborn as a low-cost regional airline, Flybe. It took over BA Connect in 2007 to create Flybe Group. Flybe operates over 180 routes to 65 European airports, and is Europe's largest regional airline, carrying over seven million passengers during 2013. The Flybe Group is a public company and employs around 2,600 people. In the UK, Flybe's largest base is Southampton Airport, with other large bases at Belfast, Birmingham, and Manchester airports. It has a total of 14 crew and aircraft bases across the United Kingdom, the Channel Islands and the Isle of Man. The airline made an operating loss of £34.3 million for the year ended March 2013, following a loss of £4.9 million in 2012. The company blamed a combination of a flat-lining UK economy, high fuel costs, passenger taxes and the depreciation of sterling against the US dollar for these increased losses. In May 2013, Flybe sold its slots at Gatwick airport to easyJet for £20 million. Monarch Airlines Monarch Airlines was founded in 1968 and operates scheduled and charter flights on behalf of its own group brand, Cosmos Holidays, as well as other tour operators. The group’s scheduled operations fly mainly to short-haul Mediterranean, Canary Island and winter ski destinations from six UK bases, with total capacity in 2012/13 of 7.4 million seats. In its early days, Monarch operated with just two aircraft, but in the early 1970s the airline began to meet the requirements of an evolving travel market by committing to an all-jet fleet. By 1972 it was carrying 500,000 passengers per year. The advent of mass market independent travel saw Monarch launch its scheduled division with increased routes in 1985. The Airbus A330 was added to the fleet in 1999, featuring a

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new Premium cabin and a range of upgraded passenger benefits, followed in 2001 by the launch of Monarch’s first online booking tool. By 2007, online reservations had grown to over 90% of total bookings. Virgin Atlantic Virgin Atlantic was founded in 1984 and is 51% owned by Sir Richard Branson’s Virgin Group, with the American company Delta Airlines owning the remaining 49%. The airline operates flights to 36, primarily long-haul, destinations from London’s Heathrow and Gatwick airports. In 2012, Virgin Atlantic carried 5.4 million passengers, making it the seventh-largest UK airline in terms of passenger volume. Virgin Atlantic has been a rival of British Airways since its inception, as British Airways had been the only airline from the UK operating long-haul routes to destinations in North America, the Caribbean, and the Far East since the late 1980s. This rivalry culminated in the ‘dirty tricks’ affair of the mid-1990s, which saw British Airways settling out of court when its lawyers discovered the lengths to which the company had gone in trying to kill off Virgin Atlantic. British Airways had to pay a legal bill of up to £3 million, damages to Richard Branson of £500,000, and a further £110,000 to his airline. Branson donated the proceeds from the case to Virgin Atlantic staff. In June 2006, however, a tip-off from Virgin Atlantic led US and UK competition authorities to investigate alleged price-fixing between Virgin Atlantic and British Airways over passenger fuel surcharges. In August 2007, BA was fined £271 million by the UK Office of Fair Trading (OFT) and the US Department of Justice; it could have been more, but the figure was upheld in recognition of a guilty plea. Virgin Atlantic was not fined, as it was given immunity for reporting the cartel to regulators. Jet2.com Jet2.com is a subsidiary of Dart Group Plc, which also includes package tour operator Jet2holidays and distribution business Fowler Welch. The airline was founded in 1978 as commercial airline Express Air Services, which went on to become Channel Express in 1983. The company name was changed to Dart Group Plc in 1991 and listed on the London Stock Exchange, switching to the Alternative Investment Market in 2005. Profits and passenger numbers for Jet2.com rose sharply between 2011 and 2012 as Jet2.com took advantage of the gap in the market created by the departure of bmibaby.com (a subsidiary of bmi that shut down in 2012). In 2012, Jet2.com launched eight new routes for the winter 2012/13 and summer 2013 seasons. Risks to British Airways’ and competitors’ future performance The future of airport infrastructure and capacity is a hot topic in the UK at the moment. All airlines have a close interest in how this debate develops, although British Airways, because of its style and prominence, has more to gain or lose than most. The Davies Commission was set up by the UK government in 2012 to make recommendations on options for maintaining the UK’s status as a global aviation hub. Headed by Sir Howard Davies, former businessman and Director of the London School of Economics, the commission presented its short-list of options in December 2013: adding a

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third runway at Heathrow; lengthening an existing runway at Heathrow; and constructing a new runway at Gatwick. They said they will ‘look again’ at the viability of a completely new airport to the east of London, but have ruled out expansion, in the short-to-medium term at least, at any of the UK’s regional ‘spoke’ airports, such as Birmingham. The Commission will produce its final recommendations by the summer of 2015. British Airways has been lobbying the Commission hard to back the case for extra hub capacity, and to fully analyse the detail of all financial and economic costs. It considers that the case for extra hub airport capacity for the UK is overwhelming and that the increase is long overdue. This debate runs in parallel with concerns over whether the UK economy as a whole should build and develop mainly in London and the southeast, or whether more can (and should) be done to promote economic development and diversity in the other regions of the UK. New aviation taxes have been a significant factor both in airlines’ expenditure and air travel popularity. Since its introduction in the UK in 2006, Air Passenger Duty (APD) rates have been increased several times, most significantly in 2012, when they shot up by 8% across the board; in other years they have risen by at least the rate of inflation. The APD band structure has been criticised by many for being unfair and for having a negative economic impact. The Caribbean Tourist Organisation, for example, complained that travellers visiting the western United States were being charged at a lower rate than those visiting the Caribbean, even though the latter is nearer the UK. This was because APD rates are calculated between capital cities. During 2012, UK outbound trips to the Caribbean region decreased by 12%, compared with a 7% fall in trips to the US. Otherwise, the evidence that APD rises are affecting demand is mixed. The future of APD is unpredictable, although taxes once introduced rarely go away. With 42% of flyers saying they are put off air travel by rising costs, pressure to identify more precise benefits and impacts of APD is likely to intensify. As well as APD, airlines in the UK have also had to contend with the regime of airport charges. In April 2013, the Civil Aviation Authority (CAA) proposed that airline charges at Heathrow should be capped at a lower rate than most of the industry was anticipating (RPI inflation minus 1.3% for the period 2014-19). A slightly higher, although still relatively modest, increase is proposed for London’s Gatwick airport. The airline industry has welcomed the CAA’s intervention, but argues that price reductions at Heathrow should go further, citing a tripling of charges over the past decade which has made Heathrow less competitive with other hub airports, such as Paris, Amsterdam and Frankfurt. As fuel costs and airport charges have mounted and passenger demand has slowed, many airlines – both full-service and budget – have turned to ancillary sales above and beyond the basic fare, in order to generate revenue and maximise profits. These ancillary sales represented 5.4% of global airline revenue in 2012, up from 4.8% in 2010. This figure rises to 7.2% of total revenue for traditional full-service airlines, and falls to 2.9% for the low-cost airlines. Research shows that airlines are increasingly risking their reputations through imposition of perceived ‘stealth charges’. These are a more negative description of the ‘ancillary’ charges described earlier. Almost three-quarters of all flyers in the UK agree that ‘budget airlines aren’t so cheap when you take into account all the hidden charges’.

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New legislation came into force in April 2013, designed to stop the practice of ‘excessive’ card surcharging for online booking across a wide range of industries. Such charges must now be included in the headline price of the product. The UK airline industry has been seen as one of the worst offenders in connection with this particular charge with, according to UK government figures, up to £350 million in card payments charged to customers in 2010. Following an investigation by the Office of Fair Trading (OFT), 12 airlines operating in the UK agreed to include credit card surcharges in their headline prices.

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APPENDIX 1 Headline financial details for British Airways and competitors

Ryanair 2011(m)† 2012 (m) 2013 (m) % change

Revenue (in €‡) - 4,324.9 4.884.0 +12.9

Operating profit (in €) - 617.9 718.9 +16.2

Pre-tax profit (in €) - 567.7 650.9 +14.7

Operating margin (%) - 14.3 14.7 +0.4%

Number of passengers - 75.8 79.3 +4.6

Staff numbers - 8,069.0 8,500.0 +5.3

Staff costs - 415.0 435.6 +5.0

flybe 2011(m) 2012 (m) 2013 (m) % change

Revenue (in £) - 615.3 614.3 -0.2

Operating profit (in £) - -4.9 -34.3 -600.0

Pre-tax profit (in £) - -6.2 -40.7 -454.0

Number of passengers - 7.6 7.6 -

Staff costs - 85.4 90.3 +6.0

easyJet 2011(m) 2012 (m) 2013 (m) % change

Revenue (in £) 3,452 3,854 - +11.6

Operating profit (in £) 269 331 - +23.0

Pre-tax profit (in £) 248 317 - +27.8

Number of passengers 54.5 58.4 - +7.2

IAG (British Airways) 2011(m) 2012 (m) 2013 (m) % change

Revenue (in £) 9,987 10,827 - +8.4

Operating profit before exceptional items (in £)

518 274 - -47.1

Operating margin (%) 5.2 2.5 - -2.7%

Number of passengers 51.7 54.6 - +5.6

Staff costs 2,172 2,345 - +8.0

Thomson Airways 2011(m) 2012 (m) 2013 (m) % change

Group revenue (in £) 14,687 14,460 - -1.5

Group operating profit (in £) 255 301 - +1.3

Pre-tax profit (in £) 144 201 - +39.6

Group operating margin (%) 1.7 2.1 - +0.3%

Staff numbers 39,198 38,235 - -2.5

Staff costs 1,701 1,734 - +1.9

† Please note that the same yearly figures are not available for all carriers ‡ Please apply the following conversions: 2011 £1 = €1.15; 2012 £1 = €1.15; 2013 £1 = €1.18 Source: HMRC

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Headline financial details for British Airways and competitors continued

Thomas Cook Airlines 2011(m) 2012 (m) 2013 (m) % change

Revenue (in £) 3,255.0 3,109.4 - -4.5

Operating profit (in £) 34.1 12.7 - -62.8

Profit margin (%) 1.0 0.4 - 0.4%

Number of passengers 7.8 6.6 - -15.4

Staff numbers 17,227.0 18,066.0 - +4.9

Staff costs 1,123.3 1,151.2 - +2.5

Monarch Airlines 2011(m) 2012 (m) 2013 (m) % change

Revenue (in ۤ) 757.8 825.1 - +8.9

Operating profit (in €) -54.1 -25.3 +53.2

Pre-tax profit (in €) -70.2 -33.4 - +52.4

Staff numbers 2,832 2,847 - +0.5

Staff costs 120.3 168.8 - +40.3

Virgin Atlantic 2011(m) 2012 (m) 2013 (m) % change

Revenue (in £) 2,271.3 2,402.1 - +5.8

Operating profit (in £) 9.7 -92.1 - -1049.5

Pre-tax profit (in £) 0.7 -98.6 - -14185.7%

Operating margin (%) 0.4 - - -

Number of passengers 5.3 5.4 - +1.9

Staff numbers 7,643.0 8,145.0 - +6.6

Staff costs 270.1 298.4 - +10.5

Jet2.com 2011(m) 2012 (m) 2013 (m) % change

Revenue (in £) 542.9 683.0 - +25.8

Operating profit (in £) 26.9 28.5 - +5.9

Pre-tax profit (in £) 26.2 28.1 - +7.3

Operating margin (%) 5.0 4.2 - -0.8%

Number of passengers 3.4 4.3 - +26.5

Staff numbers 1,507 1,957 - +29.9

Staff costs 104.2 123.4 - +18.4

Source: Mintel, Airlines – UK, July 2013 © Mintel

§ Please apply the following conversions: 2011 £1 = €1.15; 2012 £1 = €1.15; 2013 £1 = €1.18 Source: HMRC

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APPENDIX 2 Passengers uplifted at UK airports, 2007-2012

All passengers uplifted

All passengers uplifted

All passengers uplifted

International Domestic Total

(million) (million) (million)

2007 192.0 25.5 217.5

2008 189.8 24.3 214.1

2009 176.3 22.4 198.7

2010 172.7 20.4 193.1

2011 181.4 20.3 201.7

2012 183.1 20.2 203.3

2013 (estimate) 185.3 20.0 205.3

2014 (forecast) 187.4 19.8 207.2

2015 (forecast) 189.9 19.4 209.3

2016 (forecast) 192.4 18.9 211.3

2017 (forecast) 194.9 18.4 213.3

2018 (forecast) 197.5 18.0 215.5

Source: Mintel, adapted from Airlines – UK, July 2013 © Mintel

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APPENDIX 3 Passengers uplifted, by UK airport, 2007-2012

2007 2008 2009 2010 2011 2012 %

change 2007-12

(000) (000) (000) (000) (000) (000)

Heathrow 67,852 66,907 65,907 65,745 69,391 69,983 3.1

Gatwick 35,165 34,162 32,361 31,342 33,644 34,219 -2.7

Manchester 21,892 21,063 18,630 17,663 18,807 19,654 -10.2

Stansted 23,759 22,340 19,950 18,562 18,047 17,465 -26.5

Luton 9,919 10,174 9,115 8,734 9,510 9,614 -3.1

Edinburgh 9,037 8,992 9,043 8,594 9,384 9,194 1.7

Birmingham 9,134 9,577 9,093 8,564 8,608 8,916 -2.4

Glasgow 8,726 8,135 7,213 6,522 6,858 7,150 -18.1

Bristol 5,884 6,229 5,615 5,723 5,768 5,916 0.6

Liverpool (John Lennon) 5,463 5,330 4,879 5,008 5,247 4,459 -18.4

Newcastle 5,624 5,017 4,569 4,346 4,336 4,355 -22.6

Belfast International 5,236 5,223 4,536 4,011 4,102 4,312 -17.6

East Midlands International 5,407 5,616 4,653 4,111 4,208 4,068 -24.8

Aberdeen 3,411 3,290 2,984 2,763 3,083 3,329 -2.4

London City 2,912 3,260 2,797 2,781 2,993 3,017 3.6

Leeds Bradford 2,860 2,860 2,553 2,724 2,937 2,969 3.8

Belfast City (George Best) 2,187 2,571 2,622 2,740 2,397 2,246 2.7

Southampton 1,965 1,946 1,789 1,734 1,762 1,693 -13.8

Prestwick 2,421 2,414 1,817 1,660 1,296 1,067 -55.9

Cardiff Wales 2,094 1,979 1,625 1,398 1,208 1,013 -51.6

Source: Mintel, Airlines – UK, July 2013

© Mintel

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APPENDIX 4 Most popular overseas travel destinations for UK residents, 2007-2012

2007 2008 2009 2010 2011 2012

%

change 2007-12

(000) (000) (000) (000) (000) (000)

Spain 13,869 13,819 11,582 10,383 10,654 11,110 -19.9

France 11,201 10,855 9,764 9,058 8,932 8,781 -21.6

US 3,923 4,003 3,187 3,240 3,231 3,011 -23.2

Irish Republic 4,205 3,921 3,549 2,972 3,372 2,827 -32.8

Italy 3,569 3,372 2,610 2,248 2,334 2,630 -26.3

Germany 2,686 2,703 2,127 2,082 2,234 2,307 -14.1

Portugal 2,177 2,531 1,809 1,867 1,940 1,900 -12.7

Netherlands 2,239 2,008 1,840 1,758 1,868 1,900 -15.1

Greece 2,511 2,096 1,881 1,672 1,935 1,824 -27.3

Belgium 1,870 1,787 1,392 1,370 1,454 1,664 -11.0

Poland 1,552 1,578 1,554 1,443 1,446 1,573 1.4

Turkey 1,532 1,936 1,622 1,815 1,604 1,419 -7.4

Switzerland 1,194 1,158 870 890 846 865 -27.6

Cyprus 1,275 1,279 981 882 934 821 -35.6

India 972 956 847 850 914 794 -18.3

United Arab Emirates 513 651 549 499 554 580 13.1

Austria 696 800 709 600 515 512 -26.4

Malta 478 511 369 439 456 459 -3.9

Pakistan 409 404 394 430 362 416 1.7

Egypt 510 664 749 671 516 407 -20.2

Top 20 total 57,381 57,033 48,385 45,170 46,102 45,801 -20.2

Total world 69,450 69,011 58,614 55,562 56,836 56,538 -18.6

Source: Office for National Statistics, Mintel, Airlines – UK, July 2013 © Mintel

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APPENDIX 5 Purpose of flights taken over the past 12 months, April 2013 Base: 2,000 internet users aged 16+

Source: Mintel, Airlines – UK, July 2013 © Mintel

APPENDIX 6 Number of times flown in the last 12 month, April 2013 Base: 1,124 internet users aged 16+ who have flown in the last 12 months Source: Mintel, Airlines – UK, July 2013 © Mintel

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APPENDIX 7 Destination regions, types of airline and classes of travel flown in the last 12 months, April 2013 Base: 1,124 internet users aged 16+ who have flown in the last 12 months

Source: Mintel, Airlines – UK, July 2013 © Mintel

APPENDIX 8 Important factors in choosing an airline, April 2013 Base: 1,124 internet users aged 16+ who have flown in the last 12 months

Source: Mintel, Airlines – UK, July 2013 © Mintel

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APPENDIX 9 Likely incentives for choosing a particular airline regularly, April 2013 Base: 1,777 internet users aged 16+ who have flown in the past

Source: Mintel, Airlines – UK, July 2013 © Mintel

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APPENDIX 10 Length of time people are prepared to spend travelling by budget airline, April 2013 Base: 1,777 internet users aged 16+ who have flown in the past

Source: Mintel, Airlines – UK, July 2013 © Mintel

APPENDIX 11 Agreement with attitudes towards air travel, April 2013 Base: 1,777 internet users aged 16+ who have flown in the past

Source: Mintel, Airlines – UK, July 2013 © Mintel

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APPENDIX 12 British Airways Plc twelve month results 2012

12 months to 31 December

Continuing operations 2012 2011

£million £million

Revenue 10,827 9,987

Operating profit before exceptional items

274 518

Operating profit 233 518

(Loss)/profit before tax (139) 679

(Loss)/profit after tax (70) 672

Source: Adapted from British Airways Plc annual report and accounts 31 December 2012

APPENDIX 13

British Airways Plc consolidated balance sheet

As at 31 December 2012 2011

£ million £ million

NON-CURRENT ASSETS

Property, plant and equipment:

Fleet 5,909 5,765

Property 831 856

Equipment 202 207

Intangibles:

Goodwill 40 40

Landing rights 655 242

Emission allowances 39 12

Software 85 53

Investments in associates 174 232

Available-for-sale financial assets 39 39

Employee benefit assets 1,194 1,100

Derivative financial instruments 8 6

Other non-current assets 25 28

TOTAL NON-CURRENT ASSETS 9,201 8,580

NON-CURRENT ASSETS HELD FOR SALE 2 15

CURRENT ASSETS AND RECEIVABLES

Inventories 117 139

Trade receivables 488 460

Other current assets 393 273

Derivative financial instruments 37 73

Other current interest-bearing deposits 1,118 1,259

Cash and cash equivalents 418 570

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British Airways Plc consolidated balance sheet continued

As at 31 December 2012 2011

£ million £ million

TOTAL CURRENT ASSETS AND RECEIVABLES 2,634 2,774

TOTAL ASSETS 11,837 11,369

SHAREHOLDERS’ EQUITY

Issued share capital 290 290

Share premium 937 937

Other reserves 1,331 1,355

TOTAL SHAREHOLDERS’ EQUITY 2,558 2,582

NON-CONTROLLING INTERESTS 200 200

TOTAL EQUITY 2,758 2,782

NON-CURRENT LIABILITIES

Interest-bearing long-term borrowings 3,226 3,358

Employee benefit obligations 238 232

Provisions for deferred tax 721 778

Other provisions 244 179

Derivative financial instruments 67 62

Other long-term liabilities 185 295

TOTAL NON-CURRENT LIABILITIES 4,681 4,904

CURRENT LIABILITIES

Current portion of long-term borrowings 466 385

Trade and other payables 3,600 3,117

Derivative financial instruments 31 21

Current tax payable 9 12

Short-term provisions 292 148

TOTAL CURRENT LIABILITIES 4,398 3,683

TOTAL EQUITY AND LIABILITIES 11,837 11,369

Source: Extracted from British Airways Plc Annual Report and Accounts 31 December 2012

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APPENDIX 14

British Airways Plc consolidated cash-flow statement

For the year ended 31 December 2012 2011

£ million £ million

CONTINUING OPERATIONS

CASH FLOW FROM OPERATING ACTIVITIES

Operating profit 233 518

Depreciation, amortisation and impairment 720 683

Operating cash flow before working capital changes 953 1,201

Movement in inventories, trade and other receivables 89 (113)

Movement in trade and other payables and provisions 203 397

Cash payments to pensions schemes (net of service costs) (303) (351)

Payments in respect of restructuring (35) (11)

Payments in settlement of competition investigation (60) (147)

Other non-cash movement 10 11

Cash generated from operations 857 987

Interest paid (139) (147)

Taxation (3) (4)

NET CASH GENERATED FROM OPERATING ACTIVITIES 715 836

CASH FLOW USED IN INVESTING ACTIVITIES

Acquisition of subsidiary, net of cash acquired (7)

Purchase of property, plant and equipment (702) (702)

Purchase of intangible assets (79) (67)

Purchase of shares in available-for-sale financial assets (16)

Loans made to related parties (92) (21)

Repayment of loans from related parties 6 10

Proceeds from sale of non-current assets held for sale, property, plant and equipment

20 24

Proceeds from sale of business acquired exclusively with a view to resale

5

Proceeds received from loan notes 2 4

Interest received 23 28

Decrease/(increase) in other current interest bearing deposits 141 (86)

NET CASH USED IN INVESTING ACTIVITIES (683) (826)

CASH FLOW USED IN FINANCING ACTIVITIES

Proceeds from long-term borrowings 430 236

Repayments of borrowings (258) (188)

Payment of finance lease liabilities (224) (296)

Issue of share capital 1

Distributions made to holders of perpetual securities (16) (18)

NET CASH FLOW USED IN FINANCING ACTIVITIES (68) (265)

Net decrease in cash and cash equivalents from continuing operations

(36) (255)

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British Airways Plc consolidated cash-flow statement continued

For the year ended 31 December 2012 2011

£ million £ million

DISCONTINUED OPERATIONS

Net cash flow used in discontinued operations (107)

Net decrease in cash and cash equivalents (143) (255)

Net foreign exchange differences 54 46

Cash and cash equivalents at 1 January 570 779

CASH AND CASH EQUIVALENTS AT 31 DECEMBER 481 570

Source: Extracted from British Airways Plc Annual Report and Accounts 31 December 2012

APPENDIX 15 British Airways Plc consolidated income statement

For the year ended 31 December 2012 2011

£ million £ million

CONTINUING OPERATIONS

Traffic revenue

Passenger 9,499 8,721

Cargo 737 739

Other revenue 591 527

REVENUE 10,827 9,987

Employee costs 2,345 2,153

Restructuring 36 12

Depreciation, amortisation and impairment 720 683

Aircraft operating lease costs 98 73

Fuel, oil and emission costs 3,712 3,246

Engineering and other aircraft costs 625 543

Landing fees and en route charges 726 691

Handling charges, catering and other operating costs 1,213 1,052

Selling costs 466 436

Currency differences (1) 13

Accommodation, ground equipment and IT costs 613 567

TOTAL EXPENDITURE ON OPERATIONS BEFORE EXCEPTIONAL ITEMS

10,553 9,469

OPERATING PROFIT BEFORE EXCEPTIONAL ITEMS 274 518

Business combination costs (71)

Settlement of competition investigation 30

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British Airways Plc consolidated income statement continued

For the year ended 31 December 2012 2011

£ million £ million

OPERATING PROFIT 233 518

Gain on bargain purchase 58

Gains/(losses) on fuel derivatives not qualifying for hedge accounting

8 (11)

Finance costs (173) (161)

Finance income 25 32

Net financing (expense)/income relating to pensions (215) 160

Retranslation credits on currency borrowings 5 2

Loss on sale of property, plant and equipment and investments (3) (3)

Share of post-tax (losses)/profits in associates accounted for using the equity method

(66) (6)

Revaluation of convertible bond derivative liability (10) 169

Net charge relating to available-for-sale financial assets (1) (21)

(LOSS)/PROFIT BEFORE TAX FROM CONTINUING OPERATIONS (139) 679

Tax 69 (7)

(LOSS)/PROFIT AFTER TAX FROM CONTINUING OPERATIONS (70) 672

DISCONTINUED OPERATIONS

LOSS AFTER TAX FROM DISCONTINUED OPERATIONS (30)

(LOSS)/PROFIT FOR THE PERIOD (100) 672

Attributable to:

Equity holders of the parent (116) 654

Non-controlling interest 16 18

(100) 672

Source: Extracted from British Airways Plc Annual Report and Accounts 31 December 2012

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APPENDIX 16 BA uses new tech for outdoor campaign Marketing Week, 19 November 2013, by Branwell Johnson British Airways (BA) has created an outdoor campaign using new technology to interact with aircraft flying overhead. BA is claiming the technology for the ‘Magic of Flying’ campaign is an “advertising first”. The

advert, developed by the airline’s global creative technology Ogilvy 12th Floor, aims to remind people how magical flying can be. The ads are located on digital billboards in Chiswick and Piccadilly and interact with aircraft in the sky thanks to custom built surveillance technology. The system tracks the aircraft and interrupts the digital display just as it passes over the site, revealing the image of a child pointing at the plane, accompanied by its flight number and destination it’s arriving from. For example the screen may read: ‘It’s the BA0234 from Los Angeles’. This will then be followed by a message relevant to that flight, such as ‘Fly the new A380 to Los Angeles. ba.com/lookup’ or information on the lowest available fare or the temperature at the destination.The destinations can also be updated immediately depending on changing focus

routes for the airline. The ad placement and execution is being managed by Clear Channel UK’s premium digital brand Storm.

British Airways head of marketing Abigail Comber says: “This is a first, not just for British Airways but for UK advertising. We hope it will create a real ‘wow’ and people will be reminded how amazing flying is and how accessible the world can be.” BA is currently reviewing its lead agency roster with a decision expected soon. Parent company IAG has just raised its profit target by 12.5% for 2015 based on strong projections for BA. © Marketing Week

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APPENDIX 17 Introduction of new bigger planes Air Transport World, 11 December 2013, by Victoria Moores British Airways details A380 and 787 plans for 2014 British Airways (BA) plans to deploy its Airbus A380s on its London Heathrow-Washington Dulles service from next year, while its Boeing 787s will be rolled out on Calgary, Chengdu, Hyderabad and Philadelphia routes. BA has taken delivery of three Airbus A380s, which currently serve Los Angeles and Hong Kong. Johannesburg will join BA’s A380 network in February 2014, followed by Washington Dulles from Sept. 1 next year. British Airways’ 787 fleet now stands at four aircraft. These will debut on Hyderabad from March 30, Chengdu from May 5, Philadelphia from June 5 and Calgary from July 5. This will take both Chengdu and Hyderabad to an all-787 service. BA began 787 long-haul operations this fall on services from Heathrow to Toronto and New York Newark. “We’re receiving great customer feedback on our new aircraft so we’re delighted to be able to roll them out across more of our network and hope our customers enjoy them on these important Indian, Chinese and American routes. More destinations will follow as we will receive 12 A380s and 24 787s over the next three years,” BA head of UK and Ireland sales Richard Tams said. Next summer, British Airways will also step up frequencies on its Cape Town, Chengdu, Haneda and Mexico City routes. Cape Town will switch from daily to 10X-weekly. Chengdu, which launched in September, will go from 3X- to 5X-weekly from May 5. Tokyo Haneda will be re-timed and moved from 5X-weekly to daily from May 6 and an extra frequency will be added on the Mexico City route, taking it to 6X-weekly from April 27. © ATW

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APPENDIX 18 Airports Commission reveals expansion shortlist BBC News online, 17 December 2013 New runways at Heathrow and Gatwick are among the options that have been short-listed by the Airports Commission for expanding UK airport capacity. Anon (2013) Airports Commission reveals expansion. BBC Online. Source: http://www.bbc.co.uk/news/business-25402007 [Accessed March 2014]

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Chartered Postgraduate Diploma: Grade Descriptors

Level 7

Concept 15%

Application 30%

Evaluation 45%

Presentation 10%

Grade A

This grade is given for work that meets all of the assessment criteria to secure at least 70% and demonstrates a candidate’s ability to:

identify relevant theoretical principles commensurate with postgraduate level and critically apply and evaluate these within a senior marketing management context using originality of thought

critically analyse complex, incomplete or contradictory areas of knowledge of a strategic nature and communicate the outcome effectively synthesise information, with critical awareness, in a manner which is innovative and original utilise knowledge, theories and concepts from the forefront of the discipline/practice, demonstrating a mature and analytical understanding and awareness of managing and working at a strategic level

produce reliable, valid and incisive conclusions and strategic recommendations based on findings critically evaluate marketing concepts, theories and methodologies, arguing alternative approaches, with evidence of an exceptional level of conceptual understanding of strategic issues apply initiative and originality of thought in problem solving and make decisions in complex and unpredictable situations

engage confidently in academic and professional communication, reporting on actions clearly, autonomously and competently

Grade B

This grade is given for work that meets all of the assessment criteria to secure at least 60% and demonstrates a candidate’s ability to:

identify relevant theoretical principles commensurate with postgraduate level and critically apply and evaluate these within a senior marketing management context

analyse complex, incomplete or contradictory areas of knowledge of a strategic nature and communicate the outcome appropriately synthesise information in an effective manner, utilising appropriate knowledge, theories and concepts apply relevant contemporary issues demonstrating a detailed understanding and awareness of managing and working at a strategic level

produce reliable and informative conclusions and strategic recommendations based on findings evaluate marketing concepts, theories and methodologies, arguing a range of approaches, with evidence of a high level of conceptual understanding of strategic issues apply initiative in problem solving and decision making

engage in academic and professional communication, reporting on actions clearly, autonomously and competently

Grade C

This grade is given for work that meets enough of the assessment criteria to secure at least 50% and demonstrates a candidate’s ability to:

identify relevant theoretical principles commensurate with postgraduate level and apply these within a senior marketing management context

analyse areas of knowledge of a strategic nature and communicate the outcome satisfactorily analyse information in an appropriate manner, utilising knowledge of theories and concepts include some contemporary issues demonstrating an awareness of managing and working at a strategic level

produce reliable conclusions and strategic recommendations based on findings evaluate marketing concepts, theories and methodologies, with evidence of a competent level of understanding of strategic issues apply techniques of problem solving and decision making

engage in academic and professional communication, reporting on actions clearly, autonomously and competently

Grade D

This grade is given for borderline work that does not meet enough of the assessment criteria to secure a pass and is within the band 45-49%. This may be due to:

repeating case material rather than evidencing knowledge of the marketing discipline at Postgraduate Diploma level

a lack of knowledge and understanding of a strategic nature limited analysis of information with limited reference to theories and concepts limited inclusion of contemporary issues and limited awareness or understanding of managing and working at a strategic level

superficial conclusions and strategic recommendations which lack depth insufficient evaluation of marketing concepts, theories and methodologies, evidencing a lack of understanding of strategic issues an inability to apply appropriate techniques for problem solving and decision making

inappropriate use of academic and professional communication

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